RIAs can Become Talk Therapists to Tame the 3-Generation Curse

Advice to the Advisors

Sheaff Brock Team Reviews Charitable Planning to Meet Family Wealth Goals

RIAs can Become Talk Therapists to Tame the 3-Generation Curse

As Vernon Wong of First Hawaiian Bank emphasizes, there exists the very real danger that the wealth will dissipate by the third generation. As investment advisors, we’re all too familiar with the American version of that Chinese adage: “Shirtsleeves to shirtsleeves in three generations.”

While taxes and inflation (along, possibly, with the failure to follow Sheaff Brock’s advice) can all be blamed for wealth attrition, the main reason 90% of family fortunes are affected is simply, as Augusta Dwyer of Globe Wealth claims, younger family members’ lack of preparedness (or plain unwillingness) to shoulder the responsibility.

Charitable planning is key in helping families avoid that three-generation “curse,” asserts Sheaff Brock Vice President and Wealth Manager Tiffany VanHook. When the story behind the family’s wealth is shared, younger generations are better able to understand the effort needed to build and maintain family assets, and all three generations can work together in developing a strategy for the future. Advisors can be key to the success of the process by integrating philanthropic topics and issues into financial planning conversations. 

A key instrument in charitable planning can be a Donor-Advised Fund. In fact, Fidelity points out, Donor-Advised Funds are the fastest-growing charitable giving vehicle in the United States. Once the fund is established, family members may make irrevocable donations of cash, stocks, mutual funds, or even private business interests. The assets grow tax-free, and decisions about which charities to support do not need to be made right away, allowing ample time for family members to develop a thoughtful strategy for the future. That strategy might support different charities, some which may hold greater importance to younger family members, others which are cherished more by parents or grandparents.

Three specific factors which advisors can point out to their clients have the potential to make charitable planning using Donor-Advised Fund even more effective, VanHook stresses:

  1. Tax law*— Recent tax law changes have made it more difficult for many individuals and couples to itemize deductions. By doubling, or even tripling up, on gifts to a Donor-Advised Fund, taxpayers have a greater opportunity to itemize.
    *Sheaff Brock does not offer tax advice, instead working in cooperation with investors’ tax advisors to coordinate investment planning and tax strategy.
  2. Concentrated stock positions— Families who own a concentrated stock position (perhaps through a retirement, a buyout, or a business liquidation) are often reluctant to diversify for fear of dramatic capital gains tax liabilities. Within the structure of a Donor-Advised Fund, diversification can take place even as charitable planning goals are met.
  3. “Talk therapy”— The need for ongoing decision-making about which charities to support each year creates a “forum” for younger and older family members to collaborate and bond with each other, VanHook explains, as the “committee” makes ongoing choices related to charitable planning.

Charitable planning might be the perfect cure for the 3-generation curse; financial advisors are in an ideal position to encourage and enable those healing talks.

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